BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 972 (Wolk)
As Amended April 5, 2010
Hearing Date: May 4, 2010
Fiscal: No
Urgency: No
KB:jd
SUBJECT
Indemnity: Design Professionals
DESCRIPTION
This bill, sponsored by the American Council of Engineering,
would provide that all provisions, clauses, covenants, and
agreements contained in all contracts with a public agency for
design professional services that purport to require an
immediate defense under an indemnity agreement are
unenforceable, except as provided. This bill would only apply
to contracts and amendments thereto entered on or after January
1, 2011.
(This analysis reflects author's amendments to be offered in
committee.)
BACKGROUND
During the last five years, the Legislature has enacted several
measures intended to address the use of certain types of risk
shifting in indemnity agreements, particularly those that appear
in contracts for residential construction.
In 2005, AB 758 (Calderon, Chapter 394, Statutes of 2005) was
enacted to address alleged abuses of "Type I" indemnification
clauses in contracts imposed on subcontractors by builders.
These clauses typically required the subcontractor to assume
liability for the builder's negligence and misconduct, beyond
what the subcontractor would be obligated to pay under tort law
in the absence of the Type I agreement. Under AB 758, all
provisions contained in residential construction contracts
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entered into after January 1, 2006 that purport to indemnify the
builder by a subcontractor against liability for claims of
construction defects are unenforceable to the extent the claims
pertain to, or relate to the negligence of the builder or his or
her agents. These provisions of existing law may not be waived
or modified by contractual agreement, act, or omission of the
parties. AB 758 was the product of lengthy negotiations and
discussions between stakeholders.
The following year, the Legislature built upon AB 758 by
enacting AB 573 (Wolk, Chapter 455, Statutes of 2006) in
response to concerns that local public agencies were requiring
broad indemnity agreements in contracts with design
professionals. Those agreements were generally requiring the
design professional to hold the public agency harmless against
the conduct of the public agency or other third parties in a
public works project. AB 573 provided that, for contracts
entered into on or after January 1, 2007, with a public agency
for design professional services, all provisions that purport to
indemnify the public agency against liability for claims against
the public agency, are unenforceable, except for claims that
arise out of, pertain to, or relate to the negligence,
recklessness, or willful misconduct of the design professional.
Subsequently, AB 2738 (Jones, Chapter 467, Statutes of 2008) was
enacted as a follow up to AB 758 due to concerns that builders
had been circumventing the clear intent of AB 758 by requiring
subcontractors to pay for the builder's defense costs that had
no relation to the contractor's work. AB 2738, among other
things, provided that a subcontractor would have no defense or
indemnity obligation to a builder or general contractor for a
construction defect claim unless, and until, the builder or
general contractor provides a written tender of the claim to the
subcontractor which includes all of the information provided to
the builder or general contractor by the claimant or claimants
relating to claims caused by that subcontractor's scope of work.
This bill seeks to address issues left unresolved by prior
legislation with respect to a design professional's exposure to
liability for defense costs in indemnity agreements contained in
contracts with public agencies.
CHANGES TO EXISTING LAW
Existing law provides that specified rules are to be applied in
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the interpretation of a contract of indemnity, unless a contrary
intention appears. Pursuant to these rules, the person
indemnifying is bound, on request of the person indemnified, to
defend actions or proceedings brought against the latter in
respect to the matters embraced by the indemnity. However, the
person indemnified has the right to conduct those defenses, if
he or she chooses to do so. (Civ. Code Sec. 2778.)
Existing case law interprets the above-described provisions to
provide that, unless otherwise provided, a duty to defend arises
out of an indemnity obligation as soon as the litigation
commences, and regardless of whether the indemnitor (the person
indemnifying) is ultimately found negligent. (Crawford v.
Weather Shield (2008) 44 Cal.4th 541; see also UDC-Universal
Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10.)
Existing law provides that, for all contracts entered into after
January 1, 2007, for residential construction, all provisions,
clauses, covenants, and agreements contained in, collateral to,
or affecting any such construction contract, and amendments
thereto, that purport to indemnify, including the cost to
defend, the builder, as defined, by a subcontractor against
liability for claims of construction defects are unenforceable
to the extent the claims arise out of, pertain to, or relate to
the negligence of the builder or the builder's other agents,
other servants, or other independent contractors who are
directly responsible to the builder, or for defects in design
furnished by those persons, or to the extent the claims do not
arise out of, pertain to, or relate to the scope of work in the
written agreement between the parties. These provisions may not
be waived or modified by contractual agreement, act, or omission
of the parties. However, contractual provisions, clauses,
covenant, or agreements not expressly prohibited are reserved to
the agreement of the parties. (Civ. Code Sec. 2782(c).)
Existing law provides that, for all contracts entered into after
January 1, 2009 for residential contracts, a subcontractor has
no defense or indemnity obligation to a builder or general
contractor for a construction defect claim unless and until the
builder or general contractor provides a written tender of the
claim, or portion thereof, to the subcontractor which includes
all of the information provided to the builder or general
contractor by the claimant or claimants relating to claims
caused by that subcontractor's scope of work. The written
tender has the same force and effect as a notice of commencement
of a legal proceeding. (Civ. Code Sec. 2782(d).)
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Existing law provides that if a builder or contractor tenders a
claim, or a portion thereof, to a subcontractor, the
subcontractor is entitled to either defend the claim with
counsel of its choice or pay, within 30 days of receipt of an
invoice from the builder or general contractor, no more than a
reasonable allocated share of the builder's or general
contractor's defense fees and costs. Existing law further
provides that a builder, general contractor, or subcontractor
has the right to seek equitable indemnity for construction
defect claims pursuant to these provisions. (Civ. Code Sec.
2782(d) & (f).)
Existing law provides, for all contracts, and amendments to
contracts, entered into on or after January 1, 2007, with a
public agency for design professional services, all provisions,
clauses, covenants, and agreements contained in, collateral to,
or affecting these contracts, that purport to indemnify,
including the cost to defend, the public agency by a design
professional against liability for claims against the public
agency, are unenforceable, except for claims that arise out of,
pertain to, or relate to the negligence, recklessness, or
willful misconduct of the design professional. (Civ. Code Sec.
2782.8.)
This bill would provide that all provisions, clauses, covenants,
and agreements contained in, collateral to, or affecting
contracts with a public agency for design professional services
that purport to require an immediate defense under an indemnity
agreement are unenforceable, except as provided below. This
bill would apply to contracts, and amendments to contracts,
entered into on or after January 1, 2011.
This bill would provide that a design professional is not
required to defend or indemnify the indemnified party unless and
until the indemnified party provides a written tender of the
claim to the design professional, at which point the design
professional may choose to either defend the claim with counsel
of its choosing or pay a reasonable allocated share of the
indemnified party's defense fees and costs.
This bill would provide for the allocation of damages and
attorney's fees if the design professional fails to fulfill his
or her duties under the bill's provisions.
This bill would provide that nothing in its provisions would
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prohibit the parties from mutually agreeing to reasonable
contractual provisions for damages if any party fails to elect
for or perform its obligations under this bill.
This bill would provide that a public agency or design
professional shall have the right to seek equitable indemnity
for any claim governed by this bill. This bill would further
provide that nothing in this section limits, restricts, or
prohibits the right of the indemnified party or the design
professional to seek equitable indemnification against any
entity other than the indemnified party or design professional.
This bill would define design professional as including all of
the following: (1) an individual licensed as an architect, and
a business entity offering licensed architectural services; (2)
a licensed landscape architect, and a business entity offering
licensed landscape architectural services; (3) an individual
registered as a professional engineer and, a business entity
offering professional engineering services; and (4) an
individual licensed as a professional land surveyor, and a
business entity offering professional land surveying services.
This bill would define "design professional services" as
including all contractual services offered or performed by a
design professional.
This bill would define "public agency" as including any county,
city, city and county, district, school district, public
authority, municipal corporation, or other political
subdivision, joint powers authority, or public corporation in
the state. This definition would not include the State of
California.
COMMENT
1.Stated need for the bill
The author states:
This bill is in response to the 2008 California Supreme
Court decision in Crawford v. Weather Shield. In that
decision the Court held that Civil Code Section 2778 allows
indemnity contracts that require defense of [lawsuits]
against others even if the person providing the indemnity
and defense has no liability.
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Under current law an indemnitor has a duty to defend a
lawsuit covered by an indemnification contract prior to any
fault determination. This exposes the indemnitor to expense
before they have been found at fault, possibly exposing them
to excessive defense costs. An individual should only be
responsible for their own negligent conduct and not of other
third parties. Furthermore, if an individual is found to be
at fault, they should only be held liable for the extent of
the harm caused by the negligent conduct and should only
have to defend allegations involving their own misconduct.
Supporters of the bill also generally assert that Crawford has
particularly grave implications for design professionals because
professional liability insurance, in contrast to general
liability insurance typically used by owners, contractors and
subcontractors, does not cover contractually assumed liability.
Instead, professional liability insurance will cover a design
professional's common law liability, i.e., negligent acts,
errors, or omissions.
2.Crawford v. Weather Shield
In Crawford v. Weather Shield (2008) 44 Cal.4th 541, the
California Supreme Court considered whether, by their particular
terms, the provisions of a pre-2006 residential construction
subcontract obliged the subcontractor to defend its indemnitee,
the developer-builder of the project, in lawsuits brought
against both parties, even though (1) a jury ultimately found
that the subcontractor was not negligent, and (2) the parties
had accepted an interpretation of the subcontract that gave the
builder no right of indemnity unless the subcontractor was
negligent. In the contract at issue, Weather Shield (the
subcontractor) promised to (1) "indemnify and save [contractor]
harmless against all claims for damages ? losses, ? and/or theft
growing out of the execution of [Weather Shield's] work," and
(2) "at [its] own expense to defend any suit or action brought
against [the contractor] founded upon the claim of such
damage[,] loss, ? or theft." (Id. at 547-548.)
The Court held that the terms of the agreement, even if strictly
construed in Weather Shield's favor, obligated Weather Shield to
defend, from the outset, any suit against the general contractor
insofar that the suit was founded upon claims alleging damage or
loss arising from the Weather Shield's negligence. The Court
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interpreted Civil Code Section 2778(d), as placing in every
indemnity contract, unless otherwise provided, a separate duty
to assume the indemnitee's defense if tendered against all
claims embraced by the indemnity. The Court further held that
this duty does not depend on the outcome of the litigation, and
the subcontractor thus had a contractual duty to defend the suit
even thought it was later found not to be negligent.
In reaching this decision, the Court noted that, in noninsurance
contexts, the indemnitee often has superior bargaining power,
which it may utilize to unfairly shift a disproportionate share
of the financial consequences of its own legal fault onto
someone else. (Id. at 552.) The Court further noted that these
policy reasons have been the basis for statutory limits on the
enforceability of noninsurance indemnity agreements in the
construction industry. (Id.) However, focusing on the specific
language of the contract, the Court found that Weather Shield
had a contractual obligation to defend claims alleging damage or
loss arising from Weather Shield's negligent role in the
residential project.
The California Court of Appeal, Sixth Appellate District,
recently applied the Crawford holding in UDC-Universal
Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10.
The court held that, pursuant to the specific terms of the
contract at issue, a design professional had a duty to defend a
developer of a condominium project independent from the duty to
indemnify, even though a jury ultimately found that the design
professional had not been negligent. The court further held
that the duty to defend arose when the homeowners association
alleged harm resulting from deficient work that was within the
scope of the services for which the developer had retained the
consultant. The court found that the clause under scrutiny was
comparable to the one in Crawford in that it was broadly worded
to apply to claims connected in any way to any negligent act or
omission by the design professional. (Id. at 21.) The court
thus rejected the design professional's assertion that the
underlying plaintiff must have alleged negligence by the design
professional in order for the defense obligation. The court
noted that such a requirement would contravene Civil Code
Section 2778 and the Supreme Court's admonition that a duty to
defend arises out of an indemnity obligation as soon as
litigation commences and regardless of whether the indemnitor is
ultimately found negligent. (Id. at 21-22.)
3.Author's amendments narrow scope of bill to contracts with
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public agencies
As previously stated, this bill is in response to the Crawford
ruling in that a duty to defend is a separate obligation that
arises out of an indemnity agreement which commences at the
outset of litigation, irrespective of whether the indemnitor is
found negligent. The current version of the bill would have
applied prospectively to all contracts entered into for design
professional services except for residential construction
contracts. However, the author is offering amendments to narrow
the scope of the bill so that it only applies to contracts with
public agencies for design professional services.
As noted by the Court in Crawford, "[p]arties to an indemnity
contract can easily disclaim any responsibility of the
indemnitor for the indemnitee's defense, or the costs thereof.
Short of that, they can specify that the indemnitor's sole
defense obligations will be to reimburse the indemnitee for
costs incurred by the latter in defending a particular claim."
(Crawford, supra, at 559.) The contracts in both Crawford and
UDC-Universal Development did neither of these.
The public works bidding process is distinct, however, than what
occurs, for example, in negotiating a contract for commercial
construction. According to the sponsor, indemnity agreements,
particularly in the public entity sector, are often not
negotiable and are presented on a "take it or leave it basis."
Thus, a design professional contracting with a public agency may
not have the same type of bargaining power, as in contracts with
private entities, to require that language which disclaims
responsibility for the agency's defense costs be inserted into
the contract. As proposed to be amended, this bill would be
arguably consistent with the policy approved by the Legislature
in AB 573 in that it recognizes the distinct nature of the
bidding process for public works projects, and would accordingly
limit the extent that a public agency could require a design
professional to assume a duty to defend in litigation arising
out of the contract.
4.Bill would proscribe limitations to the duty to defend and
indemnity obligations
This bill would proscribe parameters with respect to the duty to
defend and indemnity obligations similar to those contained in
AB 2738 for residential construction contracts. Specifically,
this bill would provide that a subcontractor would have no
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defense or indemnity obligation to a public agency for a claim
of liability unless and until the indemnified party provides a
written tender of the claim or portion of the claim to the
design professional. The written tender would be required to
include all of the information provided to the public agency by
the claimant or claimants relating to claims caused by the
design professional's services, and would have the same force
and effect as a notice of commencement of a legal proceeding.
If a public agency tenders a claim to a design professional as
provided for in this bill, the design professional would have
the choice between the following two options, the performance of
which would be deemed to satisfy the design professional's
defense obligations to the public agency.
(a) Assume defense of the claim
The first option for the design professional is to defend the
claim with counsel of his or her choosing. If the design
professional elects to defend the claim, he or she would be
required to maintain control of the defense for any claim or
portion of the claim to which the defense obligation applies.
The design professional would be required to provide written
notice of its election to the indemnified party within 90 days
after receipt of the written tender. The defense by the
design professional would be a complete defense of the public
agency of all claims or portions thereof alleged to have been
caused by the design professional.
(b) Pay allocated share of defense fees and costs
The second option for the design professional would be to pay,
within 30 days of receipt of an invoice from the public
agency, no more than a reasonable allocated share of the
public agency's defense fees and costs, on an ongoing basis
during the pendency of the claim, subject to reallocation, and
including any amounts reallocated upon final resolution of the
claim either by settlement or judgment. The public agency
would be required to allocate a share to itself to the extent
a claim or claims are alleged to be caused by its work,
actions, or omissions. The public agency would also be
required to allocate a share to each design professional to
the extent that a claim or claims are alleged to have been
caused by the design professional. In addition, the public
agency would be required to allocate a share to all other
parties or entities that it believes are potentially liable
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for the claim or claims, regardless of whether the public
agency actually tenders the claim to any particular design
professional, and regardless of whether that design
professional is participating in the defense. Any amounts not
collected from any particular design professional could not be
collected from any other design professional.
1.Remedies for design professional's failure to perform
proscribed duties
Should a design professional fail to timely and adequately
perform the duties described above, this bill would provide that
the public agency would have the right to pursue a claim against
the design professional for any resulting damages, as well as
for interest on the defense and indemnity costs, from the date
incurred, and for reasonable attorney's fees incurred to recover
these amounts. The public agency would bear the burden of proof
to establish both the design professional's failure to meet his
or her duties and any resulting damages.
Further, this bill would specifically provide that nothing
prohibits the parties from mutually agreeing to reasonable
contractual provisions for damages if any party fails to elect
for or perform its obligations as contained in the bill. Public
agencies, design professionals, and other parties would also
have the right to seek equitable indemnity for any claim
governed by the bill's provisions, including against entities
other than the public agency or design professional. These
remedies are consistent with those contained in AB 2738.
2.Opposition
In opposition, the California Special Districts Association
writes:
This bill would impose a "one size fits all" solution to
contractual negotiations by specifying that the only defense
obligation a public agency can agree to with a design
professional is one in which the public agency does not get an
upfront defense from the design professional, but has to rely
on reimbursement of its own defense costs incurred, and then
only if the design professional is found negligent ?
Parties to a contract should be afforded the freedom to
allocate responsibilities as they see fit. This is critical
to special districts. In order to best protect taxpayers, a
district may wish to negotiate a contract which provides that
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the design professional defend the district in any claim by a
third party alleging a design defect, whether the design
professional is liable for a defective design or not, on the
theory that the district is not involved in the design
process, has delegated those duties to a professional, and
should not have to expend taxpayer funds defending the
district in a lawsuit ? Many special districts operate on
small budgets with limited staff. These districts
purposefully contract for certain projects that they do not
have the expertise to construct. In such situations, it seems
most appropriate that the district may wish to seek protection
for legal defense associated with the project.
Also in opposition, the League of California Cities writes:
SB 972 would benefit [architecture and engineering (A/E)]
consulting firms and their insurance carriers at the expense
of the public in two ways. First, the net effect would be to
shift to taxpayers legal defense costs that should be borne to
varying degrees by A/E consulting firms and their insurance
carriers. Second, it would encourage protracted litigation
because, as a practical matter, a formal finding of negligence
or intentional misconduct will be a prerequsite for the public
agency to receive indemnity from the A/E consulting firm or
its insurance carrier.
The negotiation of terms between public agencies and A/E
consulting firms should be left to the free-play of market
forces. SB 972 would preclude negotiation of broader
protection, even where the public agency is willing to pay
extra for such protection.
California's Coalition for Adequate School Housing adds:
SB 972 seeks to inappropriately erase a separate "duty to
defend" from the "indemnification of defense costs." It does
so by making the duty to defend also contingent upon the
finding of a design professional's liability. If SB 972 is
made law, it will shift the responsibility of defending claims
related to a design professional's work from design
professionals to the public agencies that contract with them.
In response, the sponsor asserts that design professionals are
prepared to defend claims involving allegations of design
professional negligence, and desire to write a statute that
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maximizes the likelihood of insurance coverage, which faithfully
incorporates elements of AB 2738 and SB 972. The sponsor
further asserts that SB 972 does not make the duty to provide an
immediate defense contingent upon a finding of design
professional liability. Instead, under SB 972, the public
agency would have the right to tender the defense to the DP, who
must then exercise one of two options - defend or pay a
reasonably allocated share of defense costs. Finally, the
sponsor states that, as a matter of public policy, uninsurable
indemnities have little value because they will deter
responsible design professional firms from bidding on a project.
This could arguably lead to a decline in the size, quality, and
financial strength of a bid pool. For opponents worried about
collateral lawsuits, the sponsor asserts that the worst outcomes
would be a meaningless indemnity agreement ignored by an
uninsured and impecunious indemnitor, and the resulting blizzard
of lawsuits.
As indicated below, a number of builders and construction
companies have also written in opposition to this bill.
However, the author's amendments to be offered in committee will
likely remove their opposition.
3.Issues for further discussion
Under the current version of the bill, a design professional
would not be required to pay defense or indemnity costs in an
amount in excess of the finally determined percentage of
liability based upon the comparative fault of the design
professional. This particular provision has no precedence in
prior legislation, and it is unclear how such a determination
would be made in practice. Further, concerns have been
expressed that defense costs are not necessarily reflective of a
person or entity's finally determined liability. For example,
someone could successfully defend against a lawsuit and
ultimately be found not negligent, but still have incurred
significant defense costs. Accordingly, the author has agreed
to remove this subdivision from the bill pending additional
discussion among stakeholders.
Support : American Institute of Architects, California Council;
American Society of Landscape Architects; California
Geotechnical Engineering Association
Opposition : (as proposed to be amended) California's Coalition
for Adequate School Housing; California Special Districts
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Association; California State Association of Counties; CSAC
Excess Insurance Authority; League of California Cities; Los
Angeles Unified School District; Regional Council of Rural
Counties; Riverside County Schools Advocacy Association; Western
Municipal Water District; (to the current version of the bill)
Branagh Inc.,; California Building Industry Association;
California Business Properties Association; California Major
Builders Council; Construction Employers Association; C. Overaa
& Co.; Harris Construction Co., Inc.; Hathaway Dinwiddie
Construction Company; Rudolph and Sletten, Inc.; S.J. Amoroso
Construction Co., Inc; TBI Construction & Construction
Management, Inc.
HISTORY
Source : American Council of Engineering Companies
Related Pending Legislation : None Known
Prior Legislation : See Background.
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